Australian currency the 'most overvalued'

Date: February 16 2013

Glenda Kwek

THE Australian dollar is the most overvalued currency in the world, but there is little will to intervene, according to a global valuation.

Using data from the Organisation for Economic Co-operation and Development's measure of purchasing power parity, The Economist's Big Mac Index and the current Real Effective Exchange Rate as compared to its five-year average, HSBC found Australia had the world's most overvalued currency, while having policymakers who were among the least active in the so-called ''currency war''.

The Australian dollar is almost 12 per cent overvalued under REER, and overvalued by 12.2 per cent according to The Economist's index.

Using the OECD's measure of purchasing power parity, the Australian dollar is overvalued by 60 per cent.

HSBC said in its report that currencies such as the Australian dollar, which are not actively participating in the so-called currency war, ''will likely see further upside should it worsen''. ''The currency war phenomenon means FX [foreign exchange] will lead other asset classes, rather than following them. FX is back in the driving seat.''

The bank's analysts added that the lack of active intervention in the foreign exchange market by Australia and New Zealand meant interest rates were less likely to rise in the next few years. ''Australia and New Zealand continue to highlight the overvalued level of their currencies, a reality which has contributed to lower interest rates in the past and will likely hinder the extent of rate hikes in the years ahead.''

An ANZ currency strategist, Andrew Salter, said the Australian dollar was only slightly overvalued relative to the level of commodity prices. He said ANZ expected the Aussie to remain around the $US1.05 mark for the rest of the year.